September 24, 2015

By Email 

Office of Exemption Determinations

Employee Benefits Security Administration

Attn: D-11712 and D-11713

U.S. Department of Labor

200 Constitution Avenue, N.W.

Washington, D.C. 20210

and

Office of Regulations and Interpretations

Employee Benefits Security Administration

Attn: Conflict of Interest Rule, Room N-5655

U.S. Department of Labor

200 Constitution Avenue N.W.

Washington, D.C. 20210

RE: Comments regarding ZRIN: 1210-ZA25 and RIN 1210-AB32

Ladies and Gentlemen:

On behalf of the U.S. Securities Markets Coalition (“Coalition”),1the Options Clearing 

Corporation (“OCC”), joined by TD Ameritrade, Inc. (“TD Ameritrade”),2hereby submit these 

comments regarding two related proposals issued by the Department of Labor (the 

“Department”): “Definition of Term ‘Fiduciary’; Conflict of Interest Rule – Retirement 

 

1 The members of the Coalition (together with OCC) are BATS Options, BOX Options Exchange, Chicago 

Board Options Exchange, International Securities Exchange, NASDAQ Options Market, NASDAQ OMX 

PHLX, NYSE Arca, and NYSE Amex. All of these members are regulated by the Securities and Exchange 

Commission (“SEC”), and OCC also is regulated by the Commodity Futures Trading Commission and The 

Board of Governors of the Federal Reserve. NASDAQ Options Market and NASDAQ OMX PHLX are 

owned by the NASDAQ OMX Group, and NYSE Arca and NYSE Amex are owned by the Intercontinental 

Exchange Group. 

2 TD Ameritrade is a wholly owned broker-dealer subsidiary of TD Ameritrade Holding Corporation 

(“AMTD”). AMTD has a 40-year history of providing financial services to self-directed investors. TD 

Ameritrade provides investing and trading services to over 6.5 million customer accounts that total more 

than $702 billion in assets, and custodial services for more than 5000 independent registered investment 

advisors. 
September 24, 2015

Page 2

Investment Advice [RIN: 1210-AB32]” (the “Fiduciary Proposal”)3and “Proposed Best Interest 

Contract Exemption, Application No. D-11712 [ZRIN: 1210-ZA25]” (the “BIC Exemption 

Proposal”) (together, “the Proposal”).4 The comments herein supplement the comments 

previously submitted by the Coalition and TD Ameritrade.5 

During the recent Department hearings on the Proposal, Gary Katz, President and Chief 

Executive Officer of the International Securities Exchange, testified on behalf of the Coalition 

regarding the Proposal’s impact on the ability of individual investors to use exchange-traded (or 

listed) options in their individual retirement accounts (“IRAs”). The Coalition and TD 

Ameritrade wish to respond to questions raised by the Department staff in response to Mr. Katz’s 

testimony by providing additional information regarding: (1) the process for permitting 

individual investors to use options in IRAs; (2) the types of options strategies permitted in IRAs; 

(3) the education available to investors trading options; and (4) the general compensation 

structure for brokers related to options trading. In providing this information, we strive to 

provide the Department with a deeper understanding of the value and prudence of using certain 

option strategies in retirement accounts. As discussed below, the Coalition and TD Ameritrade 

request that the Department: (1) revise the BIC Exemption Proposal to add exchange-traded 

options to the list of permissible asset types; (2) clarify that education or other support that does 

not rise to the level of a recommendation under FINRA rules would not cause firms to be 

consider fiduciaries under the Proposal; and (3) clarify that the process firms are required to 

follow under FINRA and options exchange rules to allow customers to trade listed options would 

not cause such firms to be considered fiduciaries under the Proposal. 

I. Options Approval – Regulatory and Firm Requirements

Under FINRA Rule 2360(b)(16) and the options exchange rules that mirror it, before 

approving a customer’s account for trading options, a broker must furnish the customer the 

Options Disclosure Document (“ODD”)6and must exercise due diligence to ascertain the 

essential facts relative to the customer, his/her financial situation and investment objectives, as 

well as his/her investment experience and knowledge; and approval or disapproval of the account 

for options trading by a principal of the firm, must be based on such information. For ease of 

reference, we have attached a copy of FINRA Rule 2360(b)(16) as Attachment A. 

 

3

80 FR 21928 (Apr. 20, 2015). 

4

80 FR 21960 (Apr. 20, 2015). 

5

See Letter from Craig S. Donohue, Executive Chairman, The Options Clearing Corporation, to the Office 

of Exemption Determinations and Office of Regulations and Interpretations, Employee Benefits Security 

Administration (July 17, 2015), <http://www.dol.gov/ebsa/pdf/1210-AB32-2-00420.pdf> (“Coalition 

Letter”) and Letter from Ellen L.S. Koplow, EVP and General Counsel, TD Ameritrade Holding 

Corporation, to the Office of Regulations and Interpretations and Office of Exemption Determinations, 

Employee Benefits Security Administration (July 21, 2015), <http://www.dol.gov/ebsa/pdf/1210-AB32-2-

00743.pdf>. 

6 Characteristics & Risks of Standardized Options, 

http://www.optionsclearing.com/about/publications/character-risks.jsp
September 24, 2015

Page 3

In compliance with these rules, brokers establish processes for approving customers to 

trade options at initial account opening, or after a brokerage account is established. In either 

situation, brokers must provide the appropriate options disclosures (including the ODD), collect

the required information, and then have a principal of the firm review and approve the 

customer’s application to trade options. Moreover, similar to a firm’s obligation under other 

FINRA rules, a firm must establish reasonable policies and procedures governing the process for 

approving a customer to trade listed options.7 This options account approval process is subject to 

periodic FINRA inspections to make sure firms are complying with the requirements of the 

FINRA and options exchange rules. Firms and principals responsible for approving customers to 

trade options that are found to be out of compliance with the requirements of those rules can be 

subject to FINRA discipline, including fines and limitations on their activities. 

II. Types of Options Strategies Permitted in IRAs

As noted in the Coalition Letter, a broker will typically use “levels” or “tiers” to 

determine the types of options transactions in which the customer may engage. Where to set 

these levels/tiers is within the broker’s discretion, subject to their interpretation of their 

obligations under FINRA and options exchange rules as well as the FINRA inspection process. 

At certain firms, such as TD Ameritrade, IRAs qualified for options trading at: (1) Tier 1 can 

engage in covered call, protective put and cash covered put transactions; (2) Tier 2 can engage in 

Tier 1 strategies plus long call and put transactions; and (3) Tier 3 can engage in Tier 1 and 2 

strategies plus spread transactions.8 The two most common options strategies utilized by TD 

Ameritrade customers approved to trade options are covered calls and protective puts, which as 

described below, carry limited risks and can be an important and beneficial part of a holistic 

retirement plan.

A. Tier 1 

As noted, TD Ameritrade permits IRAs approved to trade options at Tier 1 to engage in 

covered call, protective put and cash covered put transactions. These are conservative options 

 

7

See FINRA Rules 3110 and 3120. 

8 By way of background, a call gives a purchaser the right, but not the obligation, to purchase a stock at a 

given time and at a given price, called the strike price. The purchaser pays a premium for this right. In 

theory, a call works very much like the underlying stock itself. That is, it gains value as the price of the 

underlying stock increases and decreases in value as the price of the underlying stock decreases. The 

purchaser can only lose the premium. The seller has the obligation to deliver the stock at the strike price 

and time described in the call contract. 

A put gives the buyer of the put the right, but not the obligation, to sell a specified amount of stock at a 

given price within a given time. Similar to a call buyer, the put purchaser pays a premium to buy a put. 

Economically, it works inversely to a call option. That is, the put purchaser has the right to sell the stock 

and the seller of the put has the obligation to purchase stock at the strike price and time described in the put 

contract. An investor could purchase a protective put to reduce the risk of losing money if the underlying 

stock decreases in value.
September 24, 2015

Page 4

strategies that involve trading for income, hedging existing positions, or putting on new positions 

with risks simultaneously hedged, such as engaging in cash covered put transactions in which a 

customer writes an “at the money” or “out of the money” put option and simultaneously sets 

aside enough cash to buy the stock, with the ultimate goal of buying the stock for a price less 

than the current price. 

Covered call transactions, which are by far the most common options strategy used in 

IRAs, allow investors to generate additional income from stock positions and provide a small 

hedge for such positions should they decline in price. To illustrate how a covered call could be 

utilized in an IRA, consider a customer retired from years of working at Disney, and who owns a 

fair amount of its stock. Disney stock was trading at $115.48 per share on July 6, 2015 at 10:30 

CT. The list of September options9shows that the September 120 call is trading for 

approximately $1.80. One option contract represents 100 shares of stock. Breaking this down, it 

means that the investor can sell 10 of the September calls (representing 1000 shares) at $1.80 

each,10 and collect a premium of $1,800 for the sale of the calls ($1.80 x 100 shares per contract 

x 10 contracts). This also means that the investor understands that if the stock price increases to 

$120 or above, he has the obligation to sell the stock at $120 per share, or the strike price of the 

call, and forgo further upside. In total, his effective sale price in such a situation would be 

$121.80 ($120 + $1.80) per share. 

In sum, the covered call allows an investor to enhance his return if the stock does not 

move, or goes up to a price level under the strike price. As with any long stock position, there is 

a downside of a sell-off in Disney stock. The covered call, however, mitigates this downside 

risk, because one of the advantages of the covered call is that the investor now has a down side 

break-even at $113.68 per share ($115.48 - $1.80). Thus, this gives some, albeit limited, 

downside protection to his stock position as well. 

Protective put transactions, which are another common options strategy used in IRAs, 

allow investors who are concerned that stock positions may be ripe for a correction or fall to 

hedge against such price declines. For example, an investor owning a significant amount of 

Disney stock currently trading at $115.48 per share might purchase 10 put options trading at 

$0.48 per contract with a strike price of $100, giving him the right to sell a portion of his Disney 

stock at $100 per share until the option’s expiration. In such a transaction, the investor will pay 

$480 (plus the $17.49 transaction fee) for the 10 puts ($0.48 x 100 shares per contract x 10 

contracts). The investor is willing to pay this amount for a downside hedge on a portion of his 

stock position for the period when the options are outstanding, and if the stock moves higher by 

$0.48 in that time period, then the cost of the trade (not including transactions costs) would be 

matched by the increased value of the shares. In the alternative, if the stock were to decline 

below $100 per share, the value of the put options would correspondingly increase, providing the 

investor with a time-limited hedge against declines in the value of his stock position. 

 

9 Options expiring in the same month at different prices are called a “chain.” A screen shot of the options 

chain is included as Attachment B. 

10 At TD Ameritrade, the cost of this transaction online would equal $17.49 -- $9.99 commission plus $.075 

per contract. 
September 24, 2015

Page 5

Common, straightforward options strategies such as these can be valuable tools to help 

investors manage their retirement accounts. With the right tools and education, individual 

investors can weigh their risk/reward strategies and make thoughtful investment decisions. And 

if they need assistance along the way, firms like TD Ameritrade should be permitted to provide 

that assistance, whether through education or other support that does not rise to the level of a 

recommendation under FINRA rules. In short, activities such as education, determining whether 

a customer is qualified to trade options, and support that does not rise to the level of a 

recommendation under FINRA rules, should not result in a broker becoming a fiduciary for 

retirement accounts. Moreover, as the above examples show, the Department should recognize 

that options can be an important complement to stock positions held in IRAs and should add 

them to the list of permissible “Assets” for purposes of the BIC Exemption described in the 

Proposal. For this purpose, we recommend that options be defined as options that are listed and 

traded on a national securities exchange and that are used in such a manner that they cannot 

result in liability in excess of the value of the account engaged in trading with respect to such 

options.

B. Tiers 2 and 3

At firms like TD Ameritrade, customers that possess appropriate experience and 

knowledge about listed options can be approved for Tier 2 options trading, which allows them to 

purchase long options. For instance, the purchase of a long call option provides the purchaser of

the option with the right to buy the underlying stock at the strike price of the option. Long calls 

can be used as an alternative to buying a stock outright, and the purchaser can profit if the stock 

rises, without taking on all of the downside risk that would result from owning the stock. The 

risk associated with such transactions is the loss of the premium paid for the long option. Using 

the same option chain from the Disney example above, the price of the September 115 call is 

$4.00 at the midpoint. If a customer believed that Disney stock was going to trade higher and 

wanted to commit a limited amount of capital, the customer could do so by purchasing a call. In 

this example, if the customer wanted to purchase 10 calls, she could have upside potential with a 

limited risk of $4,000 ($4.00 x 100 shares per contract x 10 contracts). The break-even Disney 

stock price on this trade would be $119 per share (the strike price of $115 + $4.00). This trade 

would work like owning common stock in that, as the stock moves higher, the call would 

increase in value, with the exception being that if the stock goes lower the loss is predefined at 

$4,000.

At firms like TD Ameritrade, the most sophisticated options customers can be approved 

for Tier 3 options trading, which allows them to engage in spread transactions. Customers 

seeking approval for such trading are required to attend advanced education classes, obtain 

certificates from approved education facilities, pass quizzes, or provide evidence of 

commensurate experience, as well as satisfy heightened financial requirements. 
September 24, 2015

Page 6

C. IRAs and Margin

Under FINRA Rule 4210(f)(2)(A)(xxvi)(N), member firms are limited in the types of 

options transactions that can be conducted in a customer’s cash account. As such, in compliance 

with FINRA Rule 4210, firms allowing options strategies not permitted in cash accounts must 

establish margin accounts for their customers to engage in such strategies. In order to avoid 

inadvertent prohibited transactions as well as potential violations of Internal Revenue Code rules 

specifically applicable to IRAs, however, TD Ameritrade only permits IRAs to trade options that 

are “risk defined,” meaning that the IRA cannot sustain losses that exceed the value of the 

account. For example, TD Ameritrade and firms like it do not allow options trades that require 

the firm to lend money to the IRA or the account holder (such as uncovered option writing), or 

that could otherwise result in losses that exceed the value of the account (such as short sales of 

securities).

11

 

III. Options Education Available to IRA Holders

Firms like TD Ameritrade pride themselves on making extensive education resources 

available to customers. After opening an account, customers of such firms typically have access 

to secure websites and education on a variety of subjects, such as: investing strategies (both 

technical analysis and portfolio management), planning for retirement, stocks, bonds, options, 

mutual funds and exchange-traded funds, futures, forex and trading tool demonstrations. The 

education generally is in the form of easy to understand videos that begin with the basics and 

proceed to more complicated investment analysis and strategies.12 

These training videos are a representative sample of the hundreds of videos available to 

customers at firms such as TD Ameritrade after they open an account. Firms like TD Ameritrade 

view this type of educational material as being very beneficial to its customers, and the type of 

material that the Department should be encouraging. We reiterate the request that instructional 

models, videos and interactive materials regarding listed option trading qualify for an investment 

education carve-out to the definition of fiduciary advice, including with respect to IRAs. 

Similarly, we request that the definition of fiduciary advice be modified to leave more 

room for educational activities. In particular, we would like to see the Department: (i) make the 

definition more consistent with the FINRA concept of a “call to action” rather than simply a 

suggestion provided for consideration;13 and (ii) preserve the current “mutual understanding” 

requirement.

 

11 See Internal Revenue Code §§ 408(e)(2), 408(e)(4) and 4975(c)(1)(B).

12 For instance, at firms like TD Ameritrade, the following videos cover the use of options: Options 

Essentials, Options for Beginners, Investing Basics: Options, Buying and Selling Options, Investing 

Basics: Covered Calls, Buying and Selling Puts, Covered Calls, Protective Puts, Cash-Secured Puts, 

Selling a Covered Call, Options for Income, Position Sizing with Options, Reducing Volatility with 

Options, Diversifying Your Options Strategy, Long Call Trend Trading, Long Put Trend, Put Option 

Premium, Return on Risk with Options, Call Option Premium, and Long Call Verticals.

13 See, e.g., FINRA Notice to Members 01-23 (Apr. 2001).
September 24, 2015

Page 7

IV. Compensation Model Related to Options Trading

Firms like TD Ameritrade allow options approved IRAs to buy and sell the universe of 

exchange-traded options. The prevalent direct compensation model for brokers providing this 

access is straightforward. Generally, these brokers charge customers a commission (e.g., less 

than $10), plus a per-contract charge (e.g., $.75 per contract) and the pass through of any options 

exchanges fees, such as the Options Regulatory Fee.14 Firms like TD Ameritrade believe that 

these straightforward fees plus the significant utility of the listed options product have been 

important reasons why their customers are increasingly using listed options.

V. Conclusion

The Coalition and TD Ameritrade appreciate the opportunity to supplement their prior 

comments concerning the Department’s Proposal. As noted above, we believe individual 

investors are well-served by having the ability to use options in their IRAs to further their 

financial and retirement goals. As noted in our earlier letters and above, the Coalition and TD 

Ameritrade request that the Department: 

1. revise the BIC Exemption Proposal to add exchange-traded options to the list of 

permissible asset types;

2. clarify that education or other support that does not rise to the level of a 

recommendation under FINRA rules would not cause firms to be consider fiduciaries 

under the Proposal; and

3. clarify that the process firms are required to follow under FINRA and options 

exchange rules to allow customers to trade listed options would not cause such firms

to be considered fiduciaries under the Proposal. 

* * * *

 

14 The Options Regulatory Fee (“ORF”) is a fee assessed by exchanges on their members. As a practical 

matter, ORF fees typically are passed through by member firms to their customers. The ORF is collected 

by the OCC on behalf of the U.S. options exchanges. See “Options Regulatory Fee – ORF: A Guide to 

Exchange Collection Scenarios and Rates” SIFMA (Aug. 1, 2015) 

<https://www.sifma.org/uploadedfiles/issues/capital_markets/listed_options/sifmalotcorf.pdf>.
September 24, 2015

Page 8

Thank you for your consideration of this request. If you have any questions regarding 

these matters, please do not hesitate to contact us. 

Respectfully Submitted, 

Craig S. Donohue

Executive Chairman

The Options Clearing Corporation

Ellen L.S. Koplow

EVP and General Counsel

TD Ameritrade Holding Corporation
Attachment A

FINRA Rule 2360 (b)(16)

(16) Opening of Accounts

(A) Approval Required

No member or person associated with a member shall accept an order from a 

customer to purchase or write an option contract relating to an options class that is 

the subject of an options disclosure document, or approve the customer's account for 

the trading of such option, unless the broker or dealer furnishes or has furnished to 

the customer the appropriate options disclosure document(s) and the customer's 

account has been approved for options trading in accordance with the provisions of 

subparagraphs (B) through (D) hereof. 

(B) Diligence in Opening Accounts

In approving a customer’s account for options trading, a member or any person 

associated with a member shall exercise due diligence to ascertain the essential facts 

relative to the customer, his financial situation and investment objectives. Based 

upon such information, the branch office manager, a Registered Options Principal or 

a Limited Principal—General Securities Sales Supervisor shall specifically approve 

or disapprove in writing the customer’s account for options trading; provided, that if 

the branch office manager is not a Registered Options Principal or a Limited 

Principal—General Securities Sales Supervisor, account approval or disapproval 

shall within ten (10) business days be submitted to and approved or disapproved by a 

Registered Options Principal or a Limited Principal—General Securities Sales 

Supervisor. 

(i) With respect to options customers who are natural persons, members shall 

seek to obtain the following information at a minimum (information shall 

be obtained for all participants in a joint account): 

a. Investment objectives (e.g., safety of principal, income, growth, 

trading profits, speculation); 

b. Employment status (name of employer, self-employed or retired); 

c. Estimated annual income from all sources; 

d. Estimated net worth (exclusive of family residence); 

e. Estimated liquid net worth (cash, securities, other); 

f. Marital status; number of dependents; 

g. Age; and 

h. Investment experience and knowledge (e.g., number of years, size, 

frequency and type of transactions) for options, stocks and bonds, 

commodities, and other financial instruments. 
September 24, 2015

Page 10

(ii) In addition, a customer’s account records shall contain the following 

information, if applicable:

a. Source or sources of background and financial information 

(including estimates) concerning the customer; 

b. Discretionary authorization agreement on file, name, relationship 

to customer and experience of person holding trading authority; 

c. Date disclosure document(s) furnished to customer; 

d. Nature and types of transactions for which account is approved 

(e.g., buying covered writing, uncovered writing, spreading, 

discretionary transactions); 

e. Name of registered representative; 

f. Name of Registered Options Principal or Limited Principal—

General Securities Sales Supervisor approving account; date of 

approval; and 

g. Dates of verification of currency of account information. 

(iii) Members shall consider utilizing a standard account approval form so as 

to ensure the receipt of all the required information. 

(iv) Refusal of a customer to provide any of the information called for in 

subparagraph (i) shall be so noted on the customer's records at the time the 

account is opened. Information provided shall be considered together with 

the other information available in determining whether and to what extent 

to approve the account for options trading. 

(v) A record of the information obtained pursuant to this subparagraph and of 

the approval or disapproval of each such account shall be maintained by 

the member as part of its permanent records in accordance with paragraph 

(b)(17). 

(C) Verification of Customer Background and Financial Information

The background and financial information upon which the account of every new 

options customer that is a natural person has been approved for options trading, 

unless the information is included in the customer's account agreement, shall be sent 

to the customer for verification within fifteen (15) days after the customer's account 

has been approved for options trading. A copy of the background and financial 

information on file with a member shall also be sent to the customer for verification 

within fifteen (15) days after the member becomes aware of any material change in 

the customer's financial situation.
September 24, 2015

Page 11

Members shall satisfy the initial and subsequent verification of customer background 

and financial information by sending to the customer the information required in 

subparagraphs (B)(i)a. through f. hereof, as contained in the member's records and 

providing the customer with an opportunity to correct or complete the information. 

In all cases, absent advice from the customer to the contrary, the information will be 

deemed to be verified.

(D) Account Agreement

Within fifteen (15) days after a customer's account has been approved for options 

trading, a member shall obtain from the customer a written agreement that the 

customer is aware of and agrees to be bound by FINRA rules applicable to the 

trading of option contracts and, if he desires to engage in transactions in options 

issued by The Options Clearing Corporation, other than solely for OCC Cleared 

OTC Options, that the customer has received a copy of the current disclosure 

document(s) required to be furnished under this subparagraph (16) and that he is 

aware of and agrees to be bound by the rules of The Options Clearing Corporation. 

In addition, the customer shall indicate on such written agreement that he is aware of 

and agrees not to violate the position limits established pursuant to paragraph (b)(3) 

and the exercise limits established pursuant to paragraph (b)(4).

(E) Uncovered Short Option Contracts [rule text not included]
Attachment B

Screenshot of Option Chain Used in Examples